Today I am departing from usual practice. I have decided to use Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text by the end of this year. So each Friday I will publish the work I have been doing on it during the previous week in between the other work that I am pursuing. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it. Anyway, this is what I wrote today.Go get it!
Read it at Bill Mitchell — billy blog
What is macroeconomics?
by Bill Mitchell
10 comments:
Hey Tom>>>
MMT uprising!
Paul Ryan Protest at the Texas Republican Party State Convention!
Fort Worth, Texas
Tomorrow
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MamMoTh's question (Saturday, June 9, 2012 at 8:18) there IMO is actually an excellent question!
I think "in its own currency" was the key there.
Just don't get indebted in somebody else's currency, or you'll quickly find yourself on the RONG modikken' side of the exchange rate.
Well, doesn't answer Mammoth's question!
As in driving your currency to zero on the fx?
"Well, doesn't answer Mammoth's question!"
Mammoth's question was answered aptly by at least two commenters.
Why should Bill feed the troll?
While the answers are fine, it is self-contradictory to MMT.
For example, Mosler argues that for buying oil, you just need to induce a foreigner to convert his dollars to domestic currency.
Surely the reply to Mammoth holds for the above too. Paradoxical ain't it?
For example, Mosler argues that for buying oil, you just need to induce a foreigner to convert his dollars to domestic currency.
Surely the reply to Mammoth holds for the above too. Paradoxical ain't it?
The short, non-paradoxical answer to Mammoth's question is the government can afford to buy foreign currency priced in dollars but doing so in excess impairs its future ability to pay back foreign-denominated debt.
The oil parallel to Mammoth's question would be oil-denominated debt.
I can afford to buy oil with dollars today but there is no guarantee I can buy oil with dollars tomorrow at any price. Maybe no seller of oil wants my dollars in the future. Maybe there isn't any oil available for me to buy. Maybe if I tried to get all the oil with unlimited dollar-printing, such an excess would have direct consequences on the willingness of sellers to accept dollars for it.
The risk I might not be able to obtain oil in the future is a real constraint and a real default risk for oil-denominated debt.
"Foreign currency" may be freely substituted for "oil" above.
Ramanan, I answered MamMoth's question there, as "Some Guy", giving an "MMT" or common sense answer. The background is that MamMoth may be still confused about a foreign exchange point, which explains his question - why he thinks "this anything does not include foreign currency, or the point about being indebted in a foreign currency will not make much sense." I & others tried to explain things to him at Warren's blog some months ago, but we did not succeed. He proposed that foreign-denominated debt was not a problem because it could easily be paid by printing domestic currency to buy the foreign currency.
The problem is that he was arguing as if foreign exchange rates were somehow set in markets by traders bidding and offering indefinitely large amounts of foreign currencies at some rate of exchange, rather than limited amounts. So he argued that if today's rate were 10 Banana Republican pesos to one dollar, all the BR Central Bank had to do to pay off a US$10 trillion debt was to print and spend 100 trillion BR pesos. I think what led him astray is that unlike other markets, there really are traders who can do such things, offer unlimited amounts - governments & their central banks, who could do this, could effectively set currency pegs.
Calgacus,
Maybe I should have said that in the spirit of mmt, his question is an excellent one.
I understand it is a huge constraint.
However the amount of logic needed to argue is huge so I am not going to refer to anyone in the future.
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